Market Risk

Free CFA Level II lesson in Portfolio Management. 12 min read, ~1,795 words.

VaR is a threshold, not a maximum loss: it says nothing about severity beyond the cutoff. Three methods: parametric (assumes normality), historical (empirical, backward-looking), Monte Carlo (any distribution, most flexible). Expected Shortfall averages the tail beyond VaR, always = VaR, always subadditive, now the regulatory standard. Component VaRs sum to...